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What Is a Private Equity Firm?

A private equity firm is an investment company that collects money from investors to buy stakes in companies and help them expand. This differs from individual investors who purchase shares in publicly traded companies. This allows them to receive dividends, however, it has no direct influence on the company’s decision-making and operations. Private equity companies invest in groups of companies called portfolios and try to take over the management of these businesses.

They often identify a target company that could be improved and purchase it, making changes to improve efficiency, cut costs and allow the business to grow. Private equity firms can use debt to buy and take over a business in a process referred to as leveraged purchases. They then sell the company at profit and receive management fees from the companies that are part of their portfolio.

This recurring cycle of buying, improving and selling can be a time-consuming and costly for businesses especially small ones. Many are looking for alternative funding methods that allow them to access working capital without the burden of a PE firm’s management costs.

Private equity firms have fought against stereotypes that portray them as strippers, by highlighting their management expertise and the success of transformations of portfolio companies. Critics, including U.S. Senator Elizabeth Warren argues that private equity’s main focus is on quick profits, which undermines long-term goals and damages workers.

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